WHAT SHOULD BE INDIA’S ECONOMIC PRIORITIES IN A GLOBALISING WORLD

Item

Title: WHAT SHOULD BE INDIA’S
ECONOMIC PRIORITIES
IN A GLOBALISING WORLD
extracted text: WHAT SHOULD BE INDIA’S
ECONOMIC PRIORITIES
IN A GLOBALISING WORLD

Lord Meghnad Desai
Professor, London School of Economics

January 6, 1999

Indian Council for Research on
International Economic Relations
&
The Associated Chambers of
Commerce and Industry of India

WHAT SHOULD BE INDIA’S
ECONOMIC PRIORITIES
IN A GLOBALISING WORLD

Lord Meghnad Desai
January 6,1999

Foreword

When ICRIER and ASSOCHAM were exploring the
possibility of a public lecture on the theme of globalisation and
India, the question was no longer whether India should be part of
the globalisation process but how. The subject that emerged
from our deliberations was “What Should be India’s Economic
Priorities in a Globalising World?” and we could think of no
better person to deliver this lecture than Prof. Lord Meghnad
Desai. The session was chaired by former Finance Minister, Mr.
P. Chidambaram. ICRIER is privileged to make this lecture
available to a wider audience.
Lord Desai begins by suggesting that the phenomenon of
“globalisation” is nothing but an aspect of capitalism in its
present phase of development. After World War II, with
decolonisation and the establishment of a variety of inwardlooking Statist regimes, the “global” nature of capitalism had
receded into the background. However, with the rapid growth of
international trade and investment flows, the integration of
global financial markets and the collapse of many Statist
regimes, the “global” character of capitalism has once again
become manifest.

Lord Desai offers a positive case for India’s economic
integration into the global economy, emphasising its many
endowments which enable beneficial integration. According to
him, India’s biggest problem with globalisation, is one of
attitude. Despite good endowments and the favourable
inheritance of an open economy, India’s policymakers have
never been enthusiastic about economic openness. Hence, the
real challenge is one of changing attitudes. India must liberalise
its economy, Lord Desai believes, not because it has no choice
but because it is the best choice. He recommends a “pro-active”

stance on the part of Indian policymakers, especially in
multilateral trade negotiations, rather than a reactive and
defensive stance. He underscores in particular the advantages of
securing long-term foreign direct investment flows over short
term portfolio flows.
In order to realise the potential offered by gloablisation,
however, India will have to set its own house in order. In
particular, Lord Desai emphasises the positive role the State can
play in improving human development indicators like literacy,
longevity and the well-being of people. If central and state
governments strive to improve their peformance in these areas,
India would be even better equipped to benefit from
globalisation. Lord Desai’s lecture is direct and his message is
simple. In publishing this lecture for wider dissemination we
hope to facilitate the changing of the mindsets, which Lord Desai
identifies as the real challenge in India.

Isher Judge Ahluwalia
Director and Chief Executive
ICRIER

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It is a great honour to give this lecture organised jointly
by ICR1ER and ASSOCHAM at the beginning of this new year.
This is also a topic in which the two powerful interest groups —
academic researchers and industrial entrepreneurs - should be
actively engaged in debating policy, promoting alternatives and
pushing implementation. Let me first define Globalisation as it
is often argued by its detractors that it is a vague and woolly
notion. It has also been demonised to such an extent that one can
be forgiven for thinking that before the advent of globalisation
[whenever that was supposed to be] everything was alright and
the world was an equitable place with no poverty and no
business cycles. I shall then argue about India’s endowments, its
attitudes and its opportunities in face of globalisation.

What is Globalisation?
The characteristics of Globalisation are now well known.
They are:

[a]

deregulated capital markets with the possibility of
speedy transfer of capital;

[b]

communications and information technology which
makes possible “action at a distance in real time” which
can be very short

[c]

active forex markets with supporting financial markets
with new products [e.g. derivatives, options] which
allows speculators to take positions in any currency
around the world where there are potential profit
opportunities;

[d]

greater geographical spread and increased mobility of
fixed, i.e. direct, investment;

[e]

rapid and linked reactions as between different financial
markets which work round the world round the clock, as
well as between financial markets and forex markets;

[f]

the emergence of a global media network linked with a
global communications network;

[g]

the fashioning a of a global consumer culture and a
global music/fiim/TV culture benefiting from all the
above, especially [b] and [ f];

[h]

increased but as yet imperfect and legally impeded
mobility of labour;

[i]

greater awareness, though, as yet, not very effective
redress of human rights violations, ecological disasters,
famines and refugee problems, benefiting from [b] and

[fl;
[j]

speeding up of technological change leading to increased
concentration of capital via mergers and takeovers but at
the same time increased competition between the
surviving large companies.

I do not wish to argue that Globalisation is a natural
phenomenon in the sense of an earthquake or typhoon. But even
natural phenomena can be studied and mapped and forecast. We
can take steps to minimise their effects so even if I did regard
Globalisation as a natural phenomenon, it does not imply that
we are helpless in its face. Globalisation is, however, a
supranational or global force to which all countries - North and
South, Rich and Poor- have to adjust. It is a result of action by
millions of investors and traders and many large global
corporations and governments and international institutions and
NGOs and workers and farmers and refugees and migrants etc.
Globalisation or what is sometimes called the Market is just all
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of us acting in our own interests and responding to opportunities
and adjusting to constraints. Globalisation is Us. It is not some
mysterious other.

The big debate about Globalisation has been about the
power of governments, the State if you like, to counter the
effects of Globalisation. There is much controversy here as
between the views that the State is helpless against outside forces
and that if only we had the will the State could do anything
whatsoever, like it used to be able to [or thought it was able to]
do. All governments find that their capacity to shape their
economies are limited in the late twentieth century. This is
difficult for many to recognise and they refuse to admit the
validity of the limits. This is because throughout much of the
twentieth century we have been accustomed to the idea of the
State - the territorial State - as capable of running the economy.
This idea is totally absent on the Left or on the Right in the
nineteenth century. Neither Marx nor Gladstone thought the
government could or should run the economy.
It is only during the First World War and after that the
idea of the State running the economy became popular. Keynes
then gave us the tools for running the economy not only in war
time but also on an ongoing basis in peacetime for the advanced
capitalist economies. But this was conditional on strict control
over capital movements. So while trade was liberalised during
the 1950’s and 1960’s capital movements were regulated. It was
only when, in the 1970’s after the oil shock and the long
continuous full employment, inflation became an insoluble
problem for Keynesian policymakers that capital immobility was
abandoned. This was really a crisis of profitability but it put
pressures to liberalise capital movements and this was done by
USA, Germany and UK during the 1970’s. After that it was
difficult to pursue Keynesian policies.

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For developing countries independence meant an
opportunity' to launch development plans. Given the high
prestige of the USSR in the post war period many - India
especially - followed the autarchic policies of Soviet style
planning with minimal reliance on trade, import substitution and
protection to public and private sectors. With hardly any
exceptions this model proved to be a recipe for slow growth.
Countries which went on to an export growth path grew faster.
Many developing countries got caught in the global financial
nexus during the 1970’s when they borrowed petrodollars and
failed to repay. India came late on to this problem yet the end
result was the same. It borrowed abroad but failed to reorient its
economy in an export oriented way and got caught in 1991 in a
debt crisis.
But although India started on the path of economic
reform in June 1991, there is still a great deal of reluctance to
pursue that path in an enthusiastic way. The case for India to
liberalise has to be argued again and again. India’s political
leaders have given the impression that Economic reform has
happened because someone [IMF] has told us so, or because it is
fashionable, or because we wish to attract foreign investment to
build up reserves etc. There has been no positive platform built
up for reforms nor a pro-reform coalition among the people.
This is not because reform is not in people’s interest; indeed, it is
and more so than a continuation of the old policies which
consigned India to be a laggard in Asia for the first forty years
after Independence. The case for India’s economic integration
into the global economy has to be argued positively and boldly
and I hope to do so in this lecture.

Inheritance:
The Indian independence struggle got caught in a
xenophobic dislike of foreign trade and foreign capital as marks
of India’s loss of freedom. But in the history of India, it has
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always been a trading nation from times immemorial. The
Ancient Indian economy was well integrated with its trading
partners in Europe - Greece, Rome, and the Arab countries, as
well as East Africa and South East Asia. There was overland
trade with Russia and China and typically India enjoyed a
balance of trade surplus which drained its trading partners of
gold. India has never been totally self-sufficient and docs not
need to be. The export pessimism which became fashionable in
the late 1950’s and 1960’s had a fragile support in actual data
and much more in dogma.

In fact India was, among the colonised countries, the one
with the largest industrial sector. It had a native entrepreneurial
class which had started modern manufacturing in mid nineteenth
century and by 1947 had built up a world class textile industry.
In terms of volume of industrial output, India was the seventh
largest industrial country on the eve of Independence. It had a
trained industrial workforce in the larger cities, a good
infrastructure of rail, roads and ports, a higher education
establishment which though small was of high quality. India
was well poised for rapid industrial development.

Endowments:
India is well endowed for competing in global markets.
First and foremost it has a large pool of educated personnel. It is
true that the overall literacy rate is low and should be increased,
but as far as higher education is concerned India has built on its
earlier foundations. Thus while many bad universities have
proliferated and politics has ruined much higher education, there
has been a growth of the IIMs and the IITs which have
maintained a high quality.
India has also a system of laws and courts which though
slow and cumbersome guarantees due process. Thus the attempt
some years ago to shut down KFC in Delhi was soon put right by

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recourse to the courts. There is a financial system, one of the
oldest Stock Exchanges in the world and a habit of trading in
sophisticated instruments. Here again reform is needed but it is
also in hand. Banking is also an old established industry and
there arc formal as well as informal linkages in financial
markets.
Attitudes:

India’s biggest problem with globalisation is one of
attitude.
Despite the good endowments and the sound
inheritance of being an open trading economy through much of
its history, Indian policymakers have never been enthusiastic
about globalisation. This comes from a variety of sources. As a
fledgling independent country, India identified all foreign capital
and trade with imperial dependence. Thus independence meant
autonomy as well as autarchy. This tendency was deepened after
the resources crisis of the Second Five Year Plan in 1958 when
an anti trade philosophy began to take hold. A slight relaxation
in the early years of Mrs Gandhi’s Prime Ministership, when
India devalued and relaxed controls, was soon reversed because
of US hostility to India which led to the World Bank reneging on
the post devaluation package which India had been promised.
From then on till the early 1980’s, it was the Soviet model which
had the appeal to India’s planners. India did not liberalise when
many other Asian countries - Sri Lanka for instance - did.
Opening out the economy to foreign borrowing on
official account in the 1980’s was the beginning of an admission
that self reliance was not a successful strategy, that the Indian
economy was trapped in a low growth equilibrium [3.5% total
and 1.3 % per capita income growth per annum 1950-1979].
But while capital imports accelerated growth [upto 5% plus]
there was no restructuring of the economy and no reorientation
towards exports. Thus when the foreign exchange crisis hit India
in 1991, the planners were, as if, caught unawares. An economy

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which had successfully raised its rate of growth from 3.5 to 5.5
% was caught in a debt trap. There was much resentment that a
stabilisation programme was forced on India.

The radical change of economic policy inaugurated by
Manmohan Singh in 1991 was seen to be an emergency package.
Without any change in personnel, the planners of yesteryear
became the liberalisers of tomorrow, but there was no searching
analysis of the causes of the crisis nor any internalisation of the
need for a drastic restructuring of the economy. The lack of
change in personnel also meant that old vested interests which
had done well out of the old dirigiste regime and who never
admitted that the old model had failed, were still in commanding
positions waiting for their time to restore the old status quo.
Thus India became a reluctant liberaliser.
A strong anti
capitalist, anti profit ideology permeates the elite including,
unfortunately, the business elite. A lifetime of living off tariffs
and subsidised interest rates has inured the Big Business classes
against the virtues of competition. The establishment of the
Bombay Club soon after 1991 shows this. India’s socialists
[virtually everyone in politics] as well as its capitalists are hostile
to liberalisation.
Yet it is quite clear that India must liberalise. This is for
several reasons. First because it is in India’s long term interests.
The old Nchruvian strategy had lost usefulness by about 1970.
India should have switched to an export oriented path having
established an industrial base and solved its agricultural surplus
problem thanks to the Green Revolution [itself a combination of
foreign technology and Indian private sector, i.e., farmers’
responsiveness]. This is what the countries of East Asia and
South East Asia did. They used the State to transform their
economies to be globally competitive. Korea whose per capita
income was the same as India’s in 1960 went on to achieve an
income level twenty five times India by following that path [and
the recent crisis will hardly dent that advantage]. Liberalisation

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is the only way left for India to gear its economy upto a high
growth path, 7 to 8 % per annum.

Secondly, although it is argued that liberalisation leads
to inequitable outcomes, there is little evidence for this. It is true
that any restructuring will have losers and gainers, in India’s
case the losers are those who have benefited enormously from
the old structures and who' have contributed to the low
performance of the economy. They enjoy subsidies of various
sorts - tariffs for big business, water/electricity/fertiliser
subsidies for fanners, guaranteed jobs at indexed and rising
salaries for government employees, comforts of non competitive
behaviour for bankers and the corrupt gains from the business politics tie up for the politicians. These forces resist change.
But the change will help reduce poverty at an accelerated pace if
higher growth is achieved. India’s past record in poverty
reduction shows this. There was no reduction of poverty in the
years upto 1980 but rapid progress afterwards thanks to the
acceleration of growth.
Although growth alone need not
necessarily lead to poverty reduction, it is a necessary condition.
What is more the pattern of growth in the old regime was hostile
to poverty reduction.
This is because resources went into industrial growth
which was capital intensive and low employment generating.
The average tariff protection for industry was 45 % with
subsidised capital inputs. Agriculture was on the other hand
subjected to a 22 % tax which held back rural development.
Since poverty is in rural areas, the sectoral pattern of growth in
the first six five year plans was anti poor despite the rhetoric.
Thus it was the old model which was a hindrance to
poverty reduction. Its insistence on import substitution
industrialisation without regard to price or profit considerations
meant inefficient allocation of resources and slow growth as well
as stagnant employment. When the insistence of an exclusive

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’

reliance on domestic resources was dropped, growth picked up
and poverty began to go down. But there was yet a need for
restructuring as well as for foreign investment, it is this phase
that is now being reluctantly undertaken.

India has adopted a victim mentality when it really needs
to adopt a winner mentality. It appears that our policy makers
think as if the entire outside world has nothing better to do than
to conspire against India. But in fact, our slow growth has
marginalised India to the extent that a country which was in
1947 the leader of Asia, is now thought to be no part of the
dynamic Asian experience. The approach to GATT negotiations
exaggerated the harm that could be done to India by signing the
Dunkel draft. But no one explained the advantages of the MFN
status which could only be had by being in the GATT process,
that India like many other developing but industrialised
countries, had a lot to gain from access to developed country
markets and that withdrawing from GATT was never ever an
option. But the Rao government did nothing to counter populist
rhetoric until one fine day it went ahead and signed the Treaty.
Thus an opportunity to argue the advantages of freer trade was
lost. India has a lot to gain from being a dynamic export
economy. Our record in software shows that we can do it.

The same is true of FDI. One of the cardinal errors of
the 1980’s was that India borrowed from abroad in form of loans
and debt rather than equity. This meant that the risk of failure
was borne by India while with equity investment it would have
been borne by the lender. India has also wasted a lot of resources
chasing the chimera of national technology as in the Sam Pitroda
affair. The smart thing is to let FDI bring in the latest
technology and combine it with India’s skilled labour pool to
export. This is the lesson of Bangalore; borrow the hardware and
inject the software. It is no longer possible today to borrow the
money and buy the technology off the shelf. Technology comes
embodied in the FDI along with the latest management
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techniques. It is better to import and adapt and benefit that way
than insist on having local technology which may fuel national
pride but is a waste of resources.

India has indeed gone about foreign capital the wrong
way around. Portfolio capital has been imported and now forms
the bulk of the S 30 billion reserves. But this is short term
capital while what is more stable and growth enhancing is FDI.
So India has put obstacles in the path of beneficial FDI and
welcomed the volatile short term capital. China has done much
better in this respect and got a large inflow of FDI. It is India’s
reluctance to adopt liberalisation in whole hearted way which
prevents FDI from coming to India.
This is not to say that there are no problems with
liberalisation. But the correct comparison is not with some ideal
world in which liberalisation is combined with equity but the
alternative India has been pursuing which yielded neither growth
nor equity. There are attempts nowadays to portray all problems
as arising out of globalisation as if India was a paradise before
1991 or 1981. The truth is that poverty has come down faster
since 1981 and growth has accelerated since 1991, with seven
percent plus growth being registered for the first time in Indian
economic history since records began. The difficulty is to
sustain the growth and if that has not been possible the reason is
not too much, but too little liberalisation.
Indian resistance to liberalisation has deep roots not only
in the ideology of anti imperialism [which after fifty years can
hardly be more than nostalgia] but also by material interests. But
these are elite interests not those of the poor. At the forefront arc
the organised sector industrialists who have benefited from
tariffs and subsidies. It is clear that they fear opening out of the
economy because they fear competition. They speak of level
playing field as a prerequisite before liberalisation. But they have
enjoyed tariffs, subsidised low interest loans and quotas. Even
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the SMEs who should really be competitive, have been given
reservation quotas for exports. India has a lot to gain by
unleashing competition and cutting tariffs down. This will make
Indian products competitive unlike now. When the Multi Fibre
Agreement comes to an end, India could be in the forefront using
its long run lead in textiles at every level but only if they are
competitive.

This is not an issue of the State against the Market.
South Korea was able via state aid to build up a competitive car
industry while India fostered an uncompetitive technologically
stagnant one. It is not that India has to give up State intervention
because of ideological reasons. It is because State intervention
in India is of a low quality and merely an excuse for rent seeking
that India has to give up State intervention. After all in a country
blessed with an active native entrepreneurship as of 1947, how
has India managed to lose that edge and failed to build up truly
global competitive industries? The blame must be laid at the
door of the economic strategy chosen in the 1950’s and the bad
implementation of the strategy.

The modem need is of a state that can swim with the tide
and take advantage of globalisation. Rather than govern the
market, the need is to benefit from the market. Defying the
market is no longer the answer but learning to play the market
for what it is worth is the real need of the hour. It is not laissez
faire since there is need for competition as well as regulation.
What must be junked is state ownership as it has proven to be
wasteful and growth retarding and shift over to state regulation
of privatised industries or services.
Surplus needs to be
generated by the industrial sector whereas now it is surplus
absorbing. India needs to abandon anti profit policies and
ideologies and take up the challenge of building productive
profitable industries. This lesson has been learned in agriculture
during the Green Revolution. It has also been learned in many

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service industries such as software and privatised tourist
industry.

The siren sounds of protectionism come from two
angles. First are the people who will never admit that the Nehru
model failed to work especially after 1975 and would like to get
back to old style planning. They dress up their demands with
complaints about the inequities of globalisation. But as I have
already said above the first twenty-five years of Nehruvian
planning did not lower poverty nor did they lead to greater
equality of income or wealth. Top down elitist planning which
retards employment growth cannot tackle poverty; nor does it
make industries competitive.
The other strand is much more short term and that is
caused by the recession which has plagued Indian economy since
1996. The roots of this recession are however domestic not
foreign. It was the insistence of the Rao government facing an
election that the RBI squeeze out demand to bring the headline
figures on inflation down. This was overdone and while inflation
came down [Congress however lost the election!] but the
industrial sector received a nasty shock from which it has not as
yet recovered. Frequent changes of government have not helped
nor have irresponsible fiscal policies. But protectionism is not
the answer to the recession. The answer is a drastic retrenchment
of budget deficit which will ensure an easier monetary policy.
Tight fiscal policy allows the pursuit of an easier monetary
policy.
The logic of the global economy as well India’s interests
dictate that India become proactive in its liberalisation policies.
There is a big market out there and India has all the advantages
to be able to expand its exports. If the developed countries are
resorting to Non Tariff barriers, it is because they are afraid of
competition from countries like India. If India is to fight this
tide of NTBs, it can only do so by adopting an active open
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economy trade stance. After fifty years of industrialisation,
India surely cannot insist on eternal infant status.
But a bold open stance will also help at the next
Ministerial meeting of the WTO later this year. India should
take the lead in denying the developed world any grounds of
expanding NTBs under dubious grounds of labour or
environmental conditions. It should take the lead in insisting on
an open global economy in which cost effective labour intensive
exports will have unhindered access. If India tries to hide behind
some protectionist covers, it will strengthen the developed
countries’ ability to arm themselves with super non tariff
weapons. Then there will be no hiding place.

Conclusion:

India must liberalise - not because it has no choice - but
because it is the best choice. India must liberalise because that
way alone can it become a rich and prosperous nation, that way
alone is there any hope of conquering poverty. Globalisation
requires a well-educated healthy population. Education and
health, long neglected under the old regime [though it called
itself socialist] will get their proper place in the new order of
things. The State will stop wasting resources owning old
unprofitable industries, subsidising an aristocracy of workers,
and put the money saved thereby in the education and health of
the poor people. India must globalise because it is the path of
human development as well as material prosperity.

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About the Author

Lord Meghnad Desai

Meghnad Desai, Professor of Economics at the London School of
Economics and Political Science, is currently the Director of the
Centre for the Study of Global Governance, LSE. Bom in July
1940, he was educated at the University of Bombay. He secured
his PhD. from the University of Pennsylvania, USA. He has
written extensively on a wide range of subjects. From 1984 1991, he was co-cditor of the Journal of Applied Econometrics.
He has been both Chair and President of Islington South and
Finsbury Constituency Labour Party in London and was made a
peer in April 1991. He is currently Chairman of the Trustee's
Board for Training for Life, Chairman of the Management Board
of City Roads and on the Board of Tribune magazine.

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